Where is the innovation in Italy taking place? And what makes this market – a market often passed over by many venture capital investors – a potential “hidden jewel”?

Ariadne Capital Journal talks to Michele Appendino to find out.

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What characterises the Italian entrepreneurial landscape?
Well, taking the Italian Tech Tour as an example, the sector mix is different from a more tech-oriented country. In Italy, there is a broad range of innovation in different sectors; you’ll often see product service innovation rather than a pure technology focus. There are several stand alone entrepreneurs here who have built some pretty amazing businesses – many mainly devoted to exports. But the entrepreneurs tend to stay out of the lime light and they also tend to bootstrap. Because of this, a lot of companies that were selected for the Italian Tech Tour were unknown by VCs.

Overall, the Italian GDP is largely made up of many small-medium size businesses, but despite that the system - ie. the banks and the government - recognises and helps more big businesses. In Italy, the “Golden Rule” of VC – the rule that says “back the winners and don’t put good money after bad” - has almost reversed at the macro level. Instead, there’s a huge effort by the banks and the government to save what is sinking.  Not enough money is directed towards helping winners develop. All this means that entrepreneurs often succeed in spite of the system, rather than because of it.

During the bubble, there was a very short window where some people benefited.  But a lot of people piled into the “entrepreneurial scene” which meant, when the bubble burst, a lot of people got burned – and not just the entrepreneurs and the investors, but also people in related support industries that were left with bills unpaid. This created a bad image for start-ups – and, unfortunately, I think that this negative connotation remains and has affected the Italian VC community as well. There’s a persisting mentality that VC=new economy=fake businesses=huge losses.

The Southern part of Italy in particular is less developed in IT and life sciences but there are other areas where they could exploit clusters of existing expertise. I think that’s really the key: capitalise on existing companies and skills, and then leverage them with the appropriate capital structure. You can’t artificially create a cluster of innovation immediately, so it’s much faster and more natural to work with what you have.  For me the question isn’t why isn’t there more pure technology players in Italy but rather: Why wasn’t Starbucks started in Italy - given the fact that Espresso coffee is a symbol of the nation?

How is the situation for companies looking to invest in Italy?
There are not many pure play VCs in Italy. VCs such as Net Partners also have a base in Italy but tend to make investments all over Europe.

There is still a good opportunity to invest in Italy, but you need to be more sector agnostic. Often, the most exciting innovation is happening in other, more traditional, services-oriented sectors (the food industry comes to mind), where we already have several experienced entrepreneurs.  The advantage of investing in services is also that each local market is large enough to serve a venture in those sectors without going international, and there tends to be less competition because they are local.

Overall, though, I was positively surprised by the quality of the companies that we saw on the tech tour. For those investors willing to broaden their focus and consider different types of opportunities, Italy has plenty of value to offer.